The Coming Precious Metals Dividend War

Includes: ABX, AEM, AUY, GLD, HL, NEM, SLV
by: New Low Observer

On September 9, 2009, we wrote an article titled “Silver Should be the Focus.” In that article, we cautioned readers to “be mindful of the coming competitive dividend war between precious metal companies. I remember one, now defunct, gold company that paid out the dividend in actual gold. These are all gimmicks to lure investors in at a time when the rule of the day should be ‘head to the exits.’

The first salvos of the coming war to attract investors to precious metal stocks have been initiated. In April 2011, Newmont Mining (NYSE:NEM) started what it deemed … the industry's first and only dividend policy linked directly to the realized gold price…" Naturally, this isn’t the first time that gold-linked dividends have existed, but it sells really well to those unfamiliar with gold stocks and their dividend policies. On September 19, 2011, Newmont Mining announced a further enhancement of the “first ever” gold linked dividend policy with the following changes:

The enhanced policy will continue to link the quarterly dividend rate to changes in the gold price but will also provide an additional step up of 7.5 cents per share when the Company's realized gold price for a quarter exceeds $1,700 per ounce and a further step up of 2.5 cents per share (10 cents in total compared to the existing policy) when the Company's realized gold price for a quarter exceeds $2,000. At average realized gold prices below $1,700 per ounce, the current dividend policy remains unchanged. Newmont's quarterly gold price-linked dividend payments are based on the Company's average realized gold price for the preceding quarter.

Not to be outdone, Hecla Mining (NYSE:HL) announced on September 20, 2011, that it would have a dividend that is linked to the price of silver. Hecla’s silver-linked dividend policy is as follows:

The initial quarterly dividend under the policy is expected to be $0.03 per share of common stock ($0.12 per year), if Hecla's average realized silver price for the third quarter is $40.00 per ounce. All dividends, including those in the third quarter, would increase or decrease by $0.01 per share ($0.04 annually) for each $5.00 per ounce incremental increase or decrease in the average realized silver price in the preceding quarter.

Newmont Mining and Hecla Mining are soon to be joined by a crowded field of precious metal companies that are going to progressively up the ante. It will soon be indistinguishable which has the most sensible dividend policy and which has a compounding “money” losing machine. The race to offer attractive dividend payments has help from an unexpected source.

Unlike past precious metal bull markets, gold and silver stocks have stiff competition for investment capital in the form of gold and silver ETFs. In fact, more money is being plowed into the combined gold and silver ETFs than the stocks that have actual claims on getting the metal out of the ground. This presents a challenge for precious metal stocks that would normally issue shares in acquisitions of other gold companies or expand their operations. In order to get the share price up, a competitive environment of dividend increases will lead many companies to ruin in an effort to attract new investors.

As described in our 2009 recommendation on silver, one gold or silver company is going to “jump the shark” and make the dividend payments in the actual metal. When that time comes, it will be fair warning to protect your positions, though this may be indistinguishable to ebullient gold bugs at the time.
The single best dividend policy that we’ve seen among gold stocks, was held by Homestake Mining (now part of Barrick Gold (NYSE:ABX)), as described in our October 31, 2010, profile of Homestake (found here). By 1933, Homestake had a 53-year history of continuous dividend payments. Not surprisingly, Homestake was among the 2% of gold stocks that rose in value from 1924 to 1932 due, in part, to their amazing dividend policy.
Because we’re in the early stages of a gold bull market, there is little attention being paid to the quality of the dividend policy. Gold and silver linked dividend policies appear advantageous when the price of the commodity is going up. However, such a policy can imperil a poorly managed company as the average price declines.
The most effective antidote to becoming collateral damage in the coming dividend war will be to buy the gold and silver stocks that are members of the Philadelphia Gold and Silver Stock Index or the Amex Gold Bug Index. These include such companies as Barrick Gold Corporation (ABX), Agnico-Eagle Mines Limited (NYSE:AEM) and Yamana Gold, Inc. (NYSE:AUY). Ironically, institutional support, by being the member of an index, will allow gold and silver stocks to survive hard times where others will unnecessarily falter.
Disclosure: Long physical gold and silver